Investor says share levels point to market pricing deal failure (adds investor comments in paragraphs 4-5, references to EasyJet’s operators, updates share price moves)

By Prerna Bedi, Joanna Plusinska and Alessandro Parodi

LONDON, – Shares in easyJet hit a four-year high on Monday after the British budget airline agreed in principle to a £5.5 billion ($7.34 billion) takeover from US investor Castlelake, although caution over regulatory hurdles limited market gains.

EasyJet said on Sunday it was open to Castlelake’s sweetened bid of £6.90 per share, a big jump from the US firm’s initial gambit of £5.60, suggesting talks could eventually lead to taking the London-listed carrier private.

However, reflecting some investor skepticism around the deal, shares were held at £6.14, more than 9% ⁠but still well below the bid price, given European ownership rules that require airlines operating in the bloc to be majority EU-owned.

“It’s a difficult situation,” said Nick Longhurst, portfolio manager for Europe at investor Marathon Asset Management, adding that while the board may have considered EU requirements, there were still questions about funding and controls.

“This is an airline that operates under both UK and European regulations and should therefore be majority owned and controlled by EU entities/individuals, not bidder Castlelake.”

The deal shows how a series of crises in Europe, including Russia’s invasion of Ukraine, the Covid-19 pandemic and this year’s Iran war, have side-swiped airlines, putting some carriers in the crosshairs of investors for takeovers.

Airlines around the world are struggling with the weight of rising jet fuel prices, facing losses due to the conflict. Analysts have said they expect more consolidation and bankruptcies as a result of geopolitical uncertainty.

Initially, easyJet said Castlelake’s proposals were “extremely opportunistic” given the wider global context. However, the stock has risen more than 50% since Castlelake’s interest was announced in late May.

The deal will need to address ‘complex’ EU ownership rules

The bid announced by easyJet on Sunday was Castlelake’s fifth offer for the airline, and was at a premium of about 24% to easyJet’s close on Friday. That’s close to the £7 price some investors held after four previous Castlelake proposals were rejected.

Airline analyst John Strickland said the share price reflected the challenges all airlines are facing with “higher fuel prices and uncertainty in the context of the Iran war”.

He did not see antitrust issues, but pointed to European Union ownership rules that require airlines operating in the bloc to be majority-owned and controlled by EU citizens.

“The EU ownership and control elements are complex, and it is not yet entirely clear how these will be addressed,” he said.

A shareholder who declined to be named noted that current share price levels indicate that the market has a more than 30% chance of a deal.

Analysts at JPMorgan also expressed concern over how aviation-focused lenders Castellac and EasyJet would meet EU ownership rules and agree on a structure, with the views of founder and main shareholder Stelios Haji-Ioannou also unclear.

EasyJet said on Sunday that Castlelake had agreed to a “best efforts” commitment to seek regulatory approvals. Haji-Ioannou declined to comment Monday.

Castlelake previously said it would own 49% of the bidding vehicle, with the remainder held by two EU nationals, former easyJet chief operating officer Peter Bellevue and senior industry executive Mark Breen.

CASTLELAKE 【To fly EasyJet to clear skies?

JPMorgan also said shareholder approval was not guaranteed, leaving open the possibility of a counter bid, or other carriers seeking to buy parts of easyJet.

“Despite a decent premium to the lackluster trading of recent years, it still represents a deep discount to share prices in the late 2010s,” said Chris Beauchamp, chief market analyst at trading platform IG.

“(It’s) an indication of how much simpler jets are needed for someone to take the controls and create a more successful flight path.”

EasyJet flies routes to 38 European countries, operating 355 aircraft on more than 1,200 routes. It has struggled to recover since the COVID-19 pandemic, although its package holiday business and efficient Airbus fleet are bright spots.

Castlelake must formalize its offer by August 3 or walk away under British takeover rules. A possible take-private deal also includes a partial equity option.

Aviation analyst James Halstead said the offer looked like a “fair price” for easyJet to hit medium-term profit targets. Castlelake can help a firm increase its performance.

“Nothing is certain, but I think there is a high probability that it will go forward,” he said.